China Announces 0.27% Increase in Key Interest Rates

China's central bank said Saturday it will raise key interest rates by more than a quarter percentage point in a move to cool torrid economic growth.

The 0.27 percentage point hike in one-year deposit and lending benchmark rates will go into effect Sunday, the People's Bank of China said.

That would raise lending rates to 6.39% and deposit rates to 2.79%, the bank said in a statement on its Web site.

The new rates will "promote the good, fast development of the national economy" by guiding an increase in credit and investment, preserving price stability and steady operation of the financial system, the statement said.

The rate hike, the fourth in 12 months, is the latest in a series of measures China's leaders have taken to slow an economy they fear is running at an unsustainable pace. Four years of double-digit economic growth, largely driven by investment and exports, have left the financial system flush with cash.

In recent months Chinese leaders have been sounding the alarm about excessive lending, worried that it would push growth too fast and thereby accelerate recently rising inflation or touch off a debt crisis if imprudently made loans go bad.

Low deposit rates have also encouraged a rush by ordinary Chinese into the country's buoyant stock markets, exposing them to greater risks as a two-year bull market begins to flag.

Even before Saturday's rate hike, Chinese leaders had been haranguing banks to tamp down lending and twice this year raised the amount of money that banks must set aside as reserves in order to discourage lending. Banks have been compelled to buy special bonds to soak up still more of the credit pool.

Economists had expected further rate hikes after the government reported this past week that industrial output and spending on factories and other assets was up sharply despite efforts to cool off a boom in construction and investment.

Overall investment in assets rose by 23.4% in the January-February period, while spending on new real estate grew even faster, expanding by 24.3%, according to the National Bureau of Statistics.

President Hu Jintao's government wants high growth to reduce poverty and has tried to avoid sweeping measures such as interest rate rises that might slow the economy, instead targeting industries that are believed to be growing too fast.

Beijing has had only mixed success in efforts to reduce reliance on exports and investment by encouraging Chinese to spend more on travel, housing and consumer goods.

The government on Monday reported that China's trade gap in February reached its second-highest level on record, reaching US$23.7 billion, up 32.9% from the same period of 2006.